A proposed class action alleges that Sullivan & Cromwell “actively participated” in FTX’s fraudulent activities and that it was central to devising “misleading strategies”.
A group of investors in the crashed crypto-exchange FTX have filed a lawsuit against Wall Street firm Sullivan & Cromwell (S&C), accusing it of facilitating a multi-billion dollar fraud that led to the collapse of the company in 2022. The lawsuit, filed on Friday 16 February in the US District Court for the Southern District of Florida in Miami, claims that S&C’s services “went well beyond those a law firm should and ordinarily provides”. The complaint alleges that the firm’s lawyers “were eager to craft not only creative but misleading strategies that furthered FTX’s misconduct”.
FTX, led by its disgraced and incarcerated founder Samuel Bankman-Fried, stole customer deposits and used them to support the operations and investments of FTX and its affiliate Alameda Research, to fund speculative ventures, to make charitable and political contributions, and to personally enrich Bankman-Fried and others. The company also offered and sold securities without proper registration, depriving investors of financial and risk-related disclosures, and that the company maintained a “deceptive platform” that was tantamount to a Ponzi scheme, using new investor funds to pay interest and withdrawals to prior investors, and shuffling customer funds between its opaque affiliated entities. FTX collapsed when its fraud was exposed and it filed for bankruptcy, wiping out over USD 30 billion in value. In the meantime, Bankman-Fried has been found guilty of fraud in a criminal trial and is currently awaiting sentencing.
According to the lawsuit, S&C “actively participated” in the fraud by providing legal advice and representation that gave it deep insight into the exchange’s inner workings. Lawyers at the firm allegedly knew where customer money was held and how it was misappropriated by FTX and its founder Sam Bankman-Fried for risky investments, political donations and expensive real estate. In a particularly damning allegation, the law firm is accused of playing an integral part in diverting a USD 250 million fund that FTX claimed to regulators was a guarantee fund to protect depositors, but was actually comprised of customer funds, in order to secure a multi-million dollar retainer for the firm before the bankruptcy filing.
The specific causes of action detailed in the claim are civil conspiracy; common law aiding and abetting fraud; common law aiding and abetting fiduciary breach; and breaches of the Racketeer Influenced and Corrupt Organizations (RICO) Act. The claim makes some especially pointed conspiracy allegations in respect of the RICO cause of action, stating: “S&C had the specific intent to participate in the overall RICO enterprise, which is evidenced by its words and conduct in providing substantial assistance in facilitating the misappropriation of customer funds and the concealment of that misappropriation. Further, S&C reasonably calculated this assistance to shield the comingling and misappropriation of customer funds and to generally obfuscate the scheme to defraud Plaintiffs and members of the Class.”
Sullivan & Cromwell became an outside counsel to Bahamas-headquartered FTX in 2021 after the US arm of the exchange hired Ryne Miller from the firm as its general counsel. The claimants allege that Miller made it his priority to send business to his former firm, which had previously acted for FTX in several matters including its acquisition of assets from crypto-exchange Voyager in bankruptcy and in regulatory representations before the Commodity Futures Trading Commission (CFTC).
The firm’s restructuring group, led by Andy Dietderich, has since served as FTX’s main bankruptcy counsel. Last month Dietderich told a judge overseeing the insolvency case that FTX plans to repay customers in full. However, a federal appeals court has also ordered an independent examiner to investigate the case, citing potential conflicts of interest raised over Sullivan & Cromwell’s work for the exchange prior to the bankruptcy.
Sullivan & Cromwell did not immediately respond to a request for comment over the weekend or on Monday. The Moskowitz Law Firm – for the claimants – said that it intends to hold the firm accountable for its role in the FTX fraud, with lawyer Adam Moskowitz commenting in a statement: “We believe that Sullivan & Cromwell’s conduct was not only unethical but illegal, and that the firm should be held liable for the harm it caused to FTX customers and the crypto industry as a whole. We hope that this lawsuit will send a clear message to the legal profession that aiding and abetting fraud is not acceptable, especially in the emerging and vulnerable field of digital assets.”
In Garrison v Sullivan & Cromwell, Joseph Kaye of The Moskowitz Law Firm is working alongside Adam Moskowitz for the claimants, who are also represented by Kerry Miller, Molly Wells and Hogan Paschal of Fishman Haygood, and José Ferrer and Desiree Fernandez of Mark Migdal and Hayden.
